Effective financial governance is vital for the credibility and success of nonprofit organizations. Here are the top 15 financial governance questions that all nonprofit boards should know:
1. What are the financial responsibilities of a nonprofit board?
The board is responsible for overseeing the organization’s financial health, ensuring proper use of resources, approving budgets, setting financial policies, and ensuring legal and ethical compliance in financial matters.
2. Can a nonprofit organization be profitable?
Yes. While charities and nonprofit organizations hold a 501(c)(3) tax-exempt status, they can legally generate revenue in excess of their expenses so long as it is utilized for its exempt purpose.
3. What is private inurement?
Private inurement is when a 501(c)(3) nonprofit's money is devoted to personal or private uses instead of charitable purposes. This is prohibited in all nonprofits—any revenue must be used to further the nonprofit’s mission. Per the IRS, “No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.” Private inurement can apply but is not limited to board members, staff, and their family members.
4. What is self-dealing?
Self-dealing is when someone in a leadership position acts in their own best interest rather than in the interest of the organization. Any business relationship involving board members, their relatives, or their employers should be handled with care as it may be perceived as a conflict of interest or abuse of power. For example, if a nonprofit organization contracted with a board member’s company to execute a project, it could be seen as self-dealing because the board member benefits financially. It’s wise to write, adopt, and review a clear conflict-of-interest policy for your nonprofit that requires board members to disclose personal and professional affiliations annually.
5. How often should the board review financial statements?
The board should review financial statements on a regular basis. Depending on the organization, that could mean at least quarterly, with more frequent reviews based on the circumstances; for example if the organization is facing financial challenges or significant changes in funding.
6. What should a nonprofit’s budget include?
A nonprofit’s budget should include all expected income and expenses, categorized by program and administrative costs, with clear allocations for restricted and unrestricted funds.
7. What is the role of a nonprofit audit committee?
The audit committee oversees the organization’s audit process, works with external auditors, reviews financial policies and controls, and ensures the integrity of the financial reporting.
8. How should nonprofits manage restricted funds?
Restricted donations are contributions with limited or specific purposes identified with the gift or as a condition. Nonprofits should track restricted funds separately, ensure they are used only for their designated purposes, and report their usage accurately to donors and in financial statements.
9. What are the signs of healthy financial management in a nonprofit?
Indicators include timely and accurate financial reporting, adherence to budget, adequate cash flow management, maintaining reserves, and having diversified funding sources.
10. How can nonprofit boards enhance their financial literacy?
Boards can enhance financial literacy by conducting regular training sessions, involving financial experts in meetings, and encouraging board members to participate in external financial governance workshops.
11. What is UBIT?
Even though nonprofits are tax exempt, your organization still may be liable for Unrelated Business Income Tax (UBIT). Unrelated business income is typically revenue generated from a trade or business that is not substantially related to the mission or charitable services of your organization. Nonprofits with $1,000 or more of gross income from an unrelated business must file an IRS Form 990-T. UBIT may be required even if the proceeds of the activity are used to support the mission or exempt purpose.
12. What financial controls are essential for nonprofits?
Essential controls include separation of duties, regular internal and external audits, approval processes for expenditures, and secure management of financial data.
13. How should a nonprofit prepare for an annual audit?
Preparation should include organizing financial records, completing all reconciliations, ensuring compliance with financial policies, and facilitating access to information by auditors.
14. What are intermediate sanctions?
If nonprofit board members or leaders are found to have engaged in misconduct, they may face the IRS's intermediate sanctions rules before losing their tax-exempt status. These sanctions are financial penalties imposed on disqualified persons who received excess benefits from their involvement with a nonprofit organization.
15. What is the importance of financial transparency in a nonprofit?
Financial transparency builds trust with donors, stakeholders, and the public, ensures accountability, and enhances the organization’s reputation and capacity to attract further funding.
Legal Support for Nonprofit Boards
These questions and answers offer a very basic framework for nonprofit boards to understand and execute their financial governance responsibilities effectively, ensuring the organization's integrity and sustainability.
Sherwood & Robert has decades of experience acting as trusted, knowledgeable advisors to charities and nonprofit organizations. We can assist your organization with board training, assessments, risk management, and compliance. Contact us to learn how we can help your board manage its financial and governance responsibilities.
